topic Re: How much debt is considered too much? in General Credit Topics

How much debt is considered too much?

Anonymous — Sun, 18 Apr 2021 01:43:21 GMT

I know about lenders liking you to be under 30 to 40% DTI but is there a specific dollar amount compared to yearly income that's too much? Example 50k income with 20k personal loan 9k left on auto lease and about 10k in credit card debt but with all payments being under 30% DTI, wondering if lenders might start to worry? Thx for any input or ideas!!

Re: How much debt is considered too much?

Anonymous — Sun, 18 Apr 2021 01:43:56 GMT

Also no mortgage payment

Re: How much debt is considered too much?

Brian_Earl_Spilner — Sun, 18 Apr 2021 01:57:52 GMT

It's dependant on the lender. Some, like cap1 won't bat an eye if you max out your cards. Others, like chase, have an itchy trigger finger. There is no one size fits all answer.

Re: How much debt is considered too much?

Horseshoez — Sun, 18 Apr 2021 02:14:19 GMT

@Brian_Earl_Spilner wrote:
It's dependant on the lender. Some, like cap1 won't bat an eye if you max out your cards. Others, like chase, have an itchy trigger finger. There is no one size fits all answer.

Agreed, and even within lenders there is no one-size-fits-all answer. I'm thinking someone making a half-million a year with a 50% DTI wouldn't phase most lenders; someone making 10% of that with the same 50% DTI may well not qualify for credit.

Re: How much debt is considered too much?

Anonymous — Sun, 18 Apr 2021 02:30:51 GMT

But say you make 10k a month 120k a year but say you have 120k in credit card debt, minimum payments usually come out to 2% of the balance so roughly 2.5k per month or 25% DTI. You think as a lender this would be acceptable in granting more credit or this is getting out of hand?

Re: How much debt is considered too much?

Horseshoez — Sun, 18 Apr 2021 03:21:21 GMT

@Anonymous wrote:
But say you make 10k a month 120k a year but say you have 120k in credit card debt, minimum payments usually come out to 2% of the balance so roughly 2.5k per month or 25% DTI. You think as a lender this would be acceptable in granting more credit or this is getting out of hand?

When you postulate "you make 10K a month", is that gross or net? I ask because while I "make" more than that in gross pay, my net after taxes, health care, HSA, and 401K contributions is a little over half that amount. Assuming I owed $2,500 per month in minimum payments on just my credit cards, that would be a HUGE burden in addition to normal monthly spending for things like rent, utilities, subscriptions, groceries, automotive related expenses, clothing..., you get the idea, and so too do financial institutions. So yes, I believe most lenders would consider that much debt in relation to a gross income (which is typically what most lenders ask for on credit card applications), and as such, "getting out of hand".

Then there is the red flag of someone making only minimum payments, this is what I think the new FICO 10 and 10T scoring models are targeting, it is one thing to have a lot of debt, but another thing entirely when the DTI is very high (and either staying steady or climbing), and only minimum payments are being made.

Re: How much debt is considered too much?

AverageJoesCredit — Sun, 18 Apr 2021 14:03:28 GMT

When you start getting denied because of debt reasons you know you have too much debt.

Re: How much debt is considered too much?

Remedios — Sun, 18 Apr 2021 18:33:47 GMT

@Anonymous lenders don't look at percentages only, but also at raw numbers.

You can have DTI of 5% and be overextended.

Utilization padding only works up to a certain level, lenders have gotten better at risk mitigation by looking at how much you owe versus percentage you owe relative to income.

Re: How much debt is considered too much?

Slabenstein — Sun, 18 Apr 2021 19:07:06 GMT

Montly payments vs. montly income isn't the only DTI calculation lenders look at, as well. When I did lending at a small CU, we also had to look at unsecured DTI, which was total outstanding unsecured debt vs. annual income, and that ratio had its own %'s that it had to meet.

Re: How much debt is considered too much?

Anonymous — Sun, 18 Apr 2021 19:50:40 GMT

thx for all the answers I'm a bit new to a lot of this so appreciate you all. So sounds like home and auto debt is treated differently than personal loan and credit card debt right? Would make sense since it's secured so less risky. I have heard though that personal loan debt looks "better" than A lot of credit card debt? Not sure if better is the right word lol

Re: How much debt is considered too much?

Slabenstein — Sun, 18 Apr 2021 20:17:12 GMT

@Anonymous wrote:
thx for all the answers I'm a bit new to a lot of this so appreciate you all. So sounds like home and auto debt is treated differently than personal loan and credit card debt right? Would make sense since it's secured so less risky. I have heard though that personal loan debt looks "better" than A lot of credit card debt? Not sure if better is the right word lol

Unsecured credit cards and PL's will be treated differently from auto loan and mortgages wherever the difference between secured and unsecured debt is relevant. With regards to DTI specifically, if a lender is looking at a DTI calc that involves all rent and outstanding debt, it wouldn't, but if they're looking at unsecured DTI as a separate consideration then it would. To my knowledge and experience, a large personal loan won't necessarily look any better or worse to a lender than a lot of credit card debt, except in that if you have a large personal loan and not a lot of credit card debt then you wouldn't be showing cards that are close to maxed. You may have heard that an uns PL is "better" than high cc balances b/c it is true that for at least scores 8 and 9 you can see score improvement if you consolidate large outstanding cc debt into a personal loan, since those versions weight revolving util heavily and their util scoring has no memory.